SEC’s Hester Peirce Blasts Agency’s First NFT Lawsuit, Says Enforcement Action Raises Many Difficult Questions

Two commissioners at the U.S. Securities and Exchange Commission (SEC) are blasting their own agency for recently charging a company with securities violations in relation to the sale of non-fungible tokens (NFTs).

The SEC announced formal charges earlier this week against the Los Angeles-based entertainment company Impact Theory for allegedly offering NFTs as an “unregistered offering of crypto asset securities.”

The regulator says the company raised approximately $30 million after encouraging its followers to purchase NFTs from a collection known as the “Founder’s Keys.”

SEC Commissioners Hester Peirce and Mark Uyeda, however, dissented against the enforcement action, noting that the NFTs weren’t shares of Impact Theory and didn’t generate any type of dividend for the purchasers.

“The handful of company and purchaser statements cited by the order are not the kinds of promises that form an investment contract. We do not routinely bring enforcement actions against people that sell watches, paintings, or collectibles along with vague promises to build the brand and thus increase the resale value of those tangible items.”

Peirce and Uyeda say the enforcement action raises “difficult questions” that should have been answered when NFTs first began to proliferate a couple of years ago.

“Is a securities law regime best suited to ensure that NFT purchasers obtain the information they need before buying an NFT? What type of information do these purchasers want? Might other regulatory frameworks be more appropriate?”

The commissioners are curious whether the SEC now views previous NFT offerings as securities offerings, and, if so, what companies that issued NFTs can do to come into compliance.

Peirce and Uyeda also raise questions about the fact that the SEC settlement requires Impact Theory to destroy the “Founder’s Keys” NFTs in its possession.

“What precedent does this set for future cases in which the NFTs at issue represent unique pieces of digital art or music?”

Impact Theory has agreed to cease-and-desist NFT sales and pay out more than $6.1 million in fees and penalties. The entertainment company neither admits nor denies the SEC’s charges.

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